Trading Places with Tom Bowley

Will The AD Line Matter As We Speed Towards Earnings?

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Growth stocks have been hammered on both an absolute and relative basis over the past several weeks, but as we move into earnings season, should we pay attention to rising AD lines? The accumulation/distribution line, developed by Marc Chaikin, doesn't really look at whether the stock is going higher or going lower from day to day. Instead, it concentrates on a multiplier (where you finish a period relative to the high and low) and volume. If volume is extremely light, it won't really matter whether you finish on the high or low of a period. But if volume is very heavy, a close in the upper half of that day's trading range can send an AD line soaring, especially if the close is right on the high of the period.

From ChartSchool, here's the formula:

During the early stages of the pandemic, the AD line became my most important technical indicator. It separated the strong stocks (those being accumulated by institutions) from the weak. Every stock seemed to be gapping down BIG at the opening bell as panicked traders exited during the midst of the crisis, but rather quietly certain stocks were finishing down, but in the upper end of trading ranges. That resulted in prices moving lower over time, while AD lines moved higher.

Here's an example of a stock that kept gapping lower, but also kept printing hollow candles (closes above opens). Like the overall market, PayPal (PYPL) lost roughly one-third of its value during that big drop in February-March 2020, but a strange development occurred - the AD line rose:

You can see from the above that the AD line, for the most part, paralleled the price action - until March 2020. Despite all the fear and panic that was widespread, PYPL was being accumulated. Not by you and me. But by institutions. They gladly "helped us out" by buying our shares very willingly. And then.....suddenly.....PYPL did this:

I guess institutional investors just got lucky, making their 100% in 4-5 months. Well, based on the current look of the AD line, which remains fairly close to an all-time high, they're about to get lucky again as traders once again give up on the secular bull market growth story - probably because that rising 10-year treasury yield ($TNX) is so scary (sarcasm intended). After all, it's up to 1.7%! Who would possibly think about borrowing at such exorbitant rates to grow their business? Sorry, again sarcasm.

Stop the nonsense. Yes, short-term traders should absolutely be concerned about technology stocks while they're trending lower. Longer-term investors and swing/position traders? Buy into the weakness.

At 4:30pm ET today, I'm hosting a Members-Only webinar, "Changing of the Guard". Last week, I hosted a similar webinar, but looked at the market from more of a Big Picture view. Today, I'll be providing specific industries and stocks that look poised to benefit from recent market changes and current technical indications. There's no doubt there's been bullish rotation into certain areas that's likely to continue, but there's also been a "throwing the baby out with the bath water" mentality in many aggressive stocks, including leaders like PYPL. Accumulation is apparent, however, suggesting that a likely earnings season reversal higher is around the corner. I plan to provide my Top 10 AD stocks that I believe are on the verge of making a MAJOR reversal back to the upside. If you're interested in attending later today, you can sign up for a NO COST 30-day trial membership HERE. You'll be charged $7 initially, but refunded that $7 within a week. If you can't make today's event, no worries. We record all of our webinars, so you'll be able to view it at your leisure. Get started with EarningsBeats.com TODAY by CLICKING HERE!

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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